Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: December 2012 Proposed Policy-Based Loan Republic of the Union of Myanmar: Support for Myanmar s Reforms for Inclusive Growth Program

2 CURRENCY EQUIVALENTS (as of 6 December 2012) Currency unit kyat/s (MK) MK1.00 = $ $1.00 = MK ABBREVIATIONS ADB Asian Development Bank CBM Central Bank of Myanmar CESR Comprehensive Education Sector Review DICA Directorate of Investment and Companies Administration GDP gross domestic product IMF International Monetary Fund MOAI Ministry of Agriculture and Irrigation MOC Ministry of Commerce MOE Ministry of Education MOI Ministry of Industry MOFR Ministry of Finance and Revenue P3F post-program partnership framework PFM public financial management SMEs small and medium-sized enterprises NOTES (i) The fiscal year (FY) of the Government of Myanmar begins on 1 April and ends on 31 March. FY before a calendar year denotes the year in which the fiscal year starts, e.g., FY2012 begins on 1 April 2012 and ends on 31 March (ii) In this report, $ refers to US dollars. Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division, SERD Team leader Team members Peer reviewer K. Bird, Principal Economist, SERD C. de Vera, Operations Assistant, SERD T. Hla, Financial Sector Economist, SERD S. Kawazu, Senior Counsel, Office of the General Counsel P. Ramachandran, Environment Specialist, SERD C. Spohr, Senior Education Economist, SERD G. Wignaraja, Director of Research, Asian Development Bank Institute In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. The PROGRAM 1 A. Rationale 1 B. Impact and Outcome 5 C. Outputs 5 D. Development Financing Needs 9 E. Implementation Arrangements 9 III. DUE DILIGENCE 9 A. Governance 9 B. Poverty and Social 9 C. Safeguards 10 D. Risks and Mitigating Measures 10 IV. ASSURANCES AND CONDITION 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents Development Policy Letter Policy Matrix 22

4 PROGRAM AT A GLANCE 1. Project Name: Support for Myanmar's Reforms for Inclusive Growth 2. Project Number: Country: Myanmar, The Republic of the Union of 5. Sector Classification: 4. Department/Division: Southeast Asia Department/Public Management, Financial Sector, & Trade Division Sectors Primary Subsectors Public sector management Economic and public affairs management 6. Thematic Classification: Themes Primary Subthemes Promoting economic efficiency and Economic growth enabling business environment Private sector development Policy reforms Governance Capacity development Economic and financial governance Institutional development 6a. Climate Change Impact: No Climate Change Indicator available. 6b. Gender Mainstreaming: Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender elements (SGE) No gender elements 7. Targeting Classification: 8. Location Impact: General Intervention Geographic dimensions of inclusive growth Targeted Intervention Millennium development goals Income poverty at household level National High 9. Project Risk Categorization: Complex 10. Safeguards Categorization: Environment Involuntary resettlement Indigenous peoples C C C 11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Program loan Asian Development Fund Total Cofinancing: No Cofinancing available. 13. Counterpart Financing: No Counterpart Financing available. 14. Aid Effectiveness: Parallel project implementation unit Program-based approach No Yes

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed policy-based loan to the Republic of the Union of Myanmar for the Support for Myanmar s Reforms for Inclusive Growth Program The policy-based loan (PBL) supports the government s efforts to provide the foundation for a more inclusive economy through transformational changes to macroeconomic policy institutions, taking the first steps to enhance transparency and integrity in tax administration, strengthening public financial management (PFM) for better service delivery, business climate reforms, and trade liberalization. Reform priorities also include efforts to provide the foundation for promoting inclusive growth through human capital development and initiating market-based incentives for stimulating rural development. II. THE PROGRAM A. Rationale 3. The government has made reengagement with the global community a central tenet of its reform program. This reengagement has come about in the context of economic reforms precipitated by historic political reforms, including steps toward more democratic political institutions. Initiating a framework for a more permanent peace in sub-national conflict regions is also central to the government s political and economic reforms. 2 These twin reforms are interdependent and together are signaling to the international community the government s commitment to implement real change so as to reintegrate the economy with global markets and thereby restore sustainable and inclusive economic growth. 4. The government s economic agenda is large, complex, and long term. While the government has done much to lay the building blocks for a market economy, much more needs to be done in the areas of macroeconomic policy, trade, investment, and small and mediumsized enterprise (SME) development to complete this transition. Stimulating rural development and human capital development for the poor are vital for ensuring growth is inclusive. Strengthening PFM systems is also central to ensuring transparent and efficient delivery of public services for inclusive growth. The government recognizes these challenges and has recently announced these areas as key priorities of the draft national development plan that has been submitted to parliament. 3 The government also recognizes that the reform path will not be easy; there will be many complex challenges along the way, including balancing different stakeholder interests and resolving sub-national conflicts and management of these challenges will depend on how the reforms are prioritized, sequenced, and paced over time. 5. Economic growth and poverty incidence. Myanmar s disengagement with global markets since the late 1980s has meant that the economy has not benefited from globalization in terms of increased trade, investment, technology transfer, and acquisition of knowledge of good practices in a wide range of sectors, including public governance. This disengagement has resulted in institutions being unfamiliar with the efficient functions of a market economy, relatively low economic growth and a relatively high incidence of poverty compared to regional peers. Thus, lifting investment growth will be critical for creating higher and sustainable growth. 4 1 The design and monitoring framework is in Appendix 1. 2 For an overview of political developments in Myanmar see: International Crisis Group Myanmar: A New Peace Initiative. Asia Report No Jakarta and Brussels (30 November). 3 Extracted from the English translation of the speech by President U Thein Sein delivered to senior government officials on 19 June ADB Myanmar in Transition. Manila

6 2 6. Despite progress, poverty remains a key challenge. According to results from the Integrated Household Living Conditions Survey in Myanmar: Poverty Profile ( ), 5 the national poverty incidence is estimated at 25.6%; the rate is higher (29.2%) in rural areas, where about 84.0% of the poor reside. Data also suggest significant regional income disparities with strikingly high rates of poverty incidence in the states of Chin (73%), Rakhine (44%), Tanintharyi (33%), Shan (33%), and Ayeyarwardy (32%). Conflict areas are characterized by higher than average poverty rates. The survey shows a strong correlation between the incidence of poverty and families access to economic opportunities (such as wage employment), economic resources (such as land and credit), infrastructure and basic services, and post-primary education Macroeconomic stability. Maintaining macroeconomic stability low price inflation has been a major challenge for Myanmar authorities. The country has experienced frequent episodes of very high inflation from 1990 to High rates of food inflation in particular hurt the urban poor the most as food accounts for more than 70% of their consumption and the poor do not have assets to hedge against inflation. Central bank financing of the fiscal deficit has been the primary cause of Myanmar s high inflation environment. In recent years, the government has managed to lower inflation to single-digit figures on the back of lower money supply growth from less deficit financing by the Central Bank of Myanmar (CBM). Nevertheless, Myanmar faces long-term risks to macroeconomic stability. These arise from fiscal risks related to: (i) increased reliance on resource revenues in the Union budget, which are vulnerable to volatile commodity price cycles; and (ii) continued partial monetization of the budget deficit. Availability of limited monetary policy levers to contain money supply growth and sterilize capital inflows also poses risks to maintaining macroeconomic stability Weak investment climate. Insufficient investor protection, a cumbersome and complex licensing and regulatory environment, and dominance of state economic enterprises in key sectors of the economy have suppressed investments in Myanmar. The regulatory environment is complex, costly, and unpredictable. It can take up to 6 months for an investment license to be approved, as it requires cabinet approval and up to two months to get the first companies registration certificate. The finance sector is very shallow, dominated by the banking sector, and excessively regulated, and this has been a drag on investment (footnote 7). International financial sanctions also suppressed foreign direct investment and trade. These impediments are particularly burdensome on SMEs, which have limited access to credit, technology and skilled workers. 9. Limited trade integration. Myanmar s trade volume with the rest of the world is relatively small. Exports are concentrated in resources (especially gas), minerals, and timber, which together account for 58.0% of total exports. Labor-intensive manufacturing exports and agriculture and marine exports are small, amounting to $2 billion in Imports and exports are restricted through a complex non-automatic licensing system meaning that applications for licenses to import and export goods are not approved automatically and need to be reviewed by the Ministry of Commerce (MOC) first. Trade was also restricted by the foreign currency rationing scheme under the government s export first policy whereby importers must export goods and services first before gaining access to foreign currency. Micro-infrastructure for trade facilitation such as customs procedures, trade logistics, and sanitary and phytosanitary 5 Ministry of National Planning and Economic Development Integrated Household Living Conditions Survey in Myanmar : Poverty Profile. Nay Pyi Taw. 6 Summary Program Impact Assessment (accessible from the list of linked documents in Appendix 2). 7 Sector Assessment (Summary): Public Sector Management (accessible from the list of linked documents in Appendix 2).

7 3 standards are underdeveloped. Improving sanitary and phytosanitary standards, especially food management systems, is critical to improving SME access to export markets and building confidence in the recovering tourism industry. 10. Rural development. The majority of people reside in rural areas and obtain their livelihoods from agricultural activities. About 54.0% of poor people are engaged in such activities. Thus, stimulating rural development will be an important part of the government s longer-term poverty reduction strategy. The agriculture sector is primarily subsistence farming with low productivity levels, and it is vulnerable to natural disasters. There are also limited offfarm income opportunities in rural areas. Several key constraints on rural development have been identified, including pervasive rural infrastructure deficits, restrictions on land usage rights, poorly developed support services, and low human capital. Farmers limited access to credit, insurance, and financial inclusion is a major constraint on productivity increase, crop diversification, and risk mitigation. Previously imposed commercial taxes on exports of agricultural goods hurt farmers incentives to produce Human capital development. Strengthening human capital will be critical to promoting longer-term economic growth, and also to ensuring that the poor rural populations and other disadvantaged groups can participate in and benefit from the growth and broader socioeconomic transitions that are now occurring. Myanmar has significantly underinvested in the social sectors, e.g., public spending on education and health is less than 2% of GDP. Moreover, private sector participation in the education sector has been restricted. While Myanmar has achieved important gains in expanding access to primary education, progress has lagged in post-primary education. According to the Integrated Household Living Conditions Survey in Myanmar: Poverty Profile ( ) (footnote 5), the national net enrollment rate for secondary schools was 52.5% in 2010, with huge regional disparities ranging from 32.7% in Rakhine to 73.8% in Yangon. Post-primary education faces three major gaps in equitable access, education quality and relevance (that undermines education outcomes), and education management (that undermines efficiency in the sector) that tend to disproportionately affect poor populations and localities Governance. Ensuring improvements in PFM for better public service delivery and development effectiveness will be central to Myanmar s development challenges. On the revenue administration side, limited tax revenue collection has resulted in suppressed public spending, especially in the social sectors of education and health. Tax revenue collections amount to about 4% of GDP, among the lowest in the region. Revenue management is challenged by: (i) limited sources of tax revenue; (ii) a complicated tax structure that encourages tax avoidance; (iii) weak tax administration resulting in a small taxpayer base; and (iv) lack of transparency in the collection and recording of income taxes collected from the resource sector. 13. On the expenditure administration side, there is a need to ensure the public expenditure program is balanced between capital spending and recurrent expenditures. This will require continued reorientation of spending toward the priority sectors of education, health, and productive public infrastructure. Increased public spending will also require supporting measures to improve PFM systems. There are significant weaknesses in budget transparency, planning, and execution; public procurement; and reporting and accounting. These undermine government effectiveness in responding to emerging policy priorities. The present budgeting practice is input-based incremental and largely top down, with little regard to performance or 8 Sector Assessment (Summary): Agriculture and Natural Resources (accessible from the list of linked documents in Appendix 2). 9 Sector Assessment (Summary): Post-Primary Education (accessible from the list of linked documents in Appendix 2).

8 4 service delivery. Capital and recurrent budgets are prepared separately. There are inadequate internal control and audit systems. There is no strategic perspective in debt management and, with the CBM gaining more operational autonomy in the future, the Ministry of Finance and Revenue (MOFR) will need to assume more of the debt management functions from the CBM, starting with "back office" functions such as accounting, recording, and reporting on MOFR domestic and external debt. The government does recognize these weaknesses and intends to prepare measures for strengthening its PFM. For the first time, the government submitted the FY2012 union budget to Parliament for review and approval, and resumed the publication of the union budget in the national media after several years of not doing so. 14. Lessons for reengagement. ADB s reengagement with post-conflict Cambodia and Viet Nam in the early 1990s provides important lessons for assisting Myanmar in its early reform period. These lessons include the following: (i) policy reforms are more likely to achieve their outcomes and have impact if they are owned by the country and are an integral part of the country s reform agenda within an agreed performance framework; (ii) programs should focus on assisting Myanmar crystallize its reform agenda, including prioritizing reforms and defining the sequence and pace of reforms; and (iii) introduction of good practice policy reforms adapted to the country s situation through significant levels of knowledge support through technical assistance. 15. Policy-based lending approach. The proposed PBL incorporates these lessons and is designed to support and sustain the government s reforms for inclusive growth. The PBL is also aligned with ADB s interim country partnership strategy, , which has the medium-term goal of assisting the government in promoting inclusive economic development. 10 The PBL is designed to reflect the unique features of Myanmar s reengagement with ADB in two respects. First, Myanmar has debt arrears with the ADB and the World Bank and other development partners. Separate third party bridge loans have been prepared to clear debt arrears with ADB and the World Bank, and once arrears are cleared this will allow ADB full resumption of operations with Myanmar. The proposed PBL in a corresponding amount to the third party bridge loan (and a longer tenure) will help the government repay the bridge loan. 11 This approach ensures there is no fiduciary risk to use of the PBL loan proceeds. It will allow Myanmar to better manage its limited gross international reserves of about 4 months import cover, contribute to Myanmar s improved debt sustainability and improve Myanmar s future access to much needed external development financing. 12 Second, the proposed PBL, the Government of Japan s policy loan, and the World Bank development policy operation are jointly designed to help sustain the government s medium term reform agenda. As expected in the early stages of reengagement, the government s reform agenda is still developing and the benefits are only likely to show up in the medium to long term. Therefore, policy accomplishments under the PBL will be advanced by a post-program partnership framework (P3F) detailing planned activities aimed at sustaining future reforms for inclusive growth through general interventions and preparations for targeted sector interventions such as in education. Technical assistance has been and will be provided by ADB and other development partners to 10 ADB Country Partnership Strategy: Myanmar, Manila 11 A waiver of ADB s policy that no loans to a borrower with arrears to ADB is required to minimize the tenure of the bridge loan (para 41 (ii)). Also, the PBL loan will not become effective until the government s arrears to ADB has been fully repaid (para 40). 12 IMF and World Bank Myanmar: Staff Report for the 2012 Staff Monitored Program - Debt Sustainability Analysis. Washington (29 November). Based on the results of the debt sustainability analysis, clearance of debt arrears with ADB, World Bank and official creditors would bring Myanmar s classification to low risk of debt distress.

9 5 support the government s medium-term reforms (Appendix 4). Three ADB small-scale technical assistance provided input to the formulation of the PBL, P3F and the medium-term framework Development coordination. The strategic focus of major development partners is to reengage with the government and stakeholders with the aim of resuming full operations in the near term. The initial step towards full resumption of operations is Myanmar s resolution of its debt arrears to multilateral financial institutions (MFIs) and official creditors. The ADB and World Bank have worked closely with the government to resolve Myanmar s debt arrears. This included identifying the third-party bridge loan to clear debt arrears. ADB and World Bank have worked closely with the government to formulate their respective policy matrixes and planned activities supporting a common reform agenda. The policy matrixes are similar in content. ADB and the World Bank have also closely coordinated operations with the Government of Japan and the International Monetary Fund (IMF). The government (through the Department of Budget of the MOFR) has coordinated this process within government and with development partners. 14 Other external creditors are expected to discuss arrears resolution with Myanmar. B. Impact and Outcome 17. The impact will be improved inclusive growth. This will be measured by increased share of wage employment in total urban and rural employment and increased real per capita consumption of the poorest 30.0% households. The outcome will be to provide the foundation for improved policy frameworks in selected areas and sectors that support inclusive growth, such as macroeconomic policy, public finance, trade, investment and financial sector development, agriculture, and education. C. Outputs 18. The PBL supports the government s efforts to provide the foundation for a more inclusive economy through four outputs: (i) macroeconomic stability, fiscal sustainability, and strengthening public finance; (ii) increasing investment, trade, and financial integration; (iii) stimulating rural development for inclusive growth; and (iv) promoting human capital development for inclusive growth. All 22 policy measures (11 policy triggers and 11 policy milestones) required for the PBL have been fully accomplished. 1. Output 1: Macroeconomic Stability, Fiscal Sustainability, and Strengthening Public Finance 19. The PBL supports the government in initiating a series of major reforms to promote macroeconomic stability, transparency, and integrity in tax policy and administration, and transparency in the budget planning process. 20. Macroeconomic policy reforms. The government initiated a series of major monetary reforms aimed at stabilizing the macro economy with a view to achieving low and stable rates of inflation and encouraging employment-generating investment. Its focus has been to initiate steps toward a managed floating exchange rate policy and a reserve money targeting framework, with the aim of providing a nominal anchor for macroeconomic stability. Key reforms undertaken to establish the exchange rate policy included: (i) abolished the pegged kyat special drawing right (SDR) exchange rate; 15 (ii) established a retail market for foreign exchange; and 13 TA 8113-MYA: Support for Trade Policy Development, TA 8114-MYA: Capacity Development Support for Improving the Business Climate, and TA 8156-MYA: Improving Fiscal Revenue Mobilization. 14 Development Coordination (accessible from the list of linked documents in Appendix 2). 15 For 35 years the kyat was officially pegged MK6.4 = $1 whereas the parallel market exchange rate fluctuated around MK800 MK900 = $1 in early 2012.

10 6 (iii) established foreign currency auctions to set the reference rate for the kyat dollar rate, which is published on the CBM website. To support the managed float the CBM will need to implement effective monetary tools to manage kyat liquidity in the domestic market and sterilize capital inflows. Toward achieving this objective, the CBM has developed a basic monetary policy framework of targeting reserve money. The monetary tool is a CBM auction for interest-earning deposit accounts. The CBM issued a regulation setting up deposit auctions in June 2012 and implemented its first interest-earning deposit auction in September While establishment of the managed float is a significant goal toward a unified exchange rate system, the lifting of remaining exchange rate restrictions is necessary for full unification of the exchange rate. This will require the phasing out of foreign exchange certificates, which are currently not guaranteed under the new exchange rate management law enacted in 2012 (this law provides the CBM with powers to regulate, manage, and develop the foreign exchange markets). Thus, under the P3F, the CBM intends to lift remaining foreign currency exchange restrictions, especially phasing out of foreign exchange certificates. It will continue to refine the basic monetary policy framework. 21. Second, the government drafted amendments to the Central Bank Law that provides the CBM with significantly more operational autonomy with corresponding accountability and a mandate to conduct open market operations. The draft is expected to be submitted to Parliament in January A limitation on its autonomy is that the draft law does not prevent central bank financing of the union budget deficit, although parliamentary approval will now be necessary before the CBM can finance the deficit. Despite this limitation, once enacted the new Central Bank Law will be a major step toward strengthening the governance structure of the CBM and providing it with powers to implement monetary policy necessary for macroeconomic stability. 22. Third, in July 2012 the government approved a new organizational structure of the CBM to support implementation of its expanded and strengthened mandates provided for by the proposed amendments to the Central Bank Law. The new organizational structure provides for oversight of the CBM by a board of directors which will include significant representation of independent directors. There will be a monetary policy committee mandated to make decisions on the CBM's monetary policy stance. Under the P3F, the CBM will complete implementation of its new organizational structure and make progress in implementing mandates under the new Central Bank Law. 23. Strengthening tax policy and administration. The government has made some important steps toward simplifying tax structures to ensure broader tax bases and more stable tax revenues. The government: (i) abolished and replaced gross profit tax with net profit tax, which is standard taxation practice; (ii) increased taxable income thresholds for salary earners; and (iii) abolished differential corporate tax rates on foreign exchange earnings. The government also simplified commercial tax on goods and services by reducing the number of different tax rates applied as well as expanding the number of services subject to the commercial tax. The government has also initiated steps for better transparency by publishing on the MOFR website the English and Myanmar language versions of the corporate income tax law and the commercial tax law. This has been supplemented by government education outreach activities to taxpayers explaining the tax laws. Under the P3F, the government intends to establish a high-level tax administration reform steering committee to oversee development of a tax administration reform road map with technical support from development partners. 24. Improving public financial management. Until FY2012, government budget planning processes were limited. The budget was only approved by cabinet and was rarely published in the national media. The official administrative exchange rate of MK6.4 = $1 was used to value foreign currency revenues, which produced highly inaccurate budget estimates. In 2012 the

11 7 government implemented several measures to promote budget transparency. These measures included: (i) applied the market exchange rate to foreign currency revenues and expenditures in the union budget; (ii) submitted the union budget to Parliament for approval for the first time; and (iii) resumed publication of the union budget law in the media. Another major transparency reform was improving the structure of the union budget by preparing separate union and state and regional budgets for the first time in FY Improving transparency and PFM systems will be a long-term effort. In the short term and under the P3F, the government will complete a comprehensive review of the PFM system and develop and start implementing a reform action plan covering budget process, budget execution and internal control, accounting, and reporting. The government will enhance public debt management, starting with strengthening the institutional arrangements for debt management, in particular establishing the back office necessary for accounting, recording and reporting MOFR public debt with ADB technical assistance. Over the medium term, the government will include a complete financing plan for the Union budget in its submission to Parliament. 2. Output 2: Improving Investment, Trade, and Financial Integration 26. The PBL supports the government in creating an enabling environment for private sector development, including SME development through a better investment climate, trade policy reforms, and finance sector development. 27. Creating an enabling environment for private sector and small and medium-sized enterprise development. The government initiated a series of reforms to improve private sector development. As a first step, it drafted amendments to the foreign investment law to incorporate investor protection and streamline approval procedures. The draft was re-submitted to parliament in October 2012 for improvement. The government also initiated steps to reduce the regulatory cost of starting and operating a business. These included: (i) Directorate of Investment and Companies Administration (DICA) established a companies registration office in Yangon (in addition to Nay Pyi Taw); (ii) extended the registration renewal period from 2 years to 3 years; and (iii) with ADB technical assistance, initiated development of a road map to upgrade company registrations and to expand registration offices in other major urban centers (i.e., Mandalay). Finally, the government established an institutional and policy framework for SME development through the following main measures: (i) established the SME Center at the Ministry of Industry (MOI) to coordinate and develop policy and strategies; (ii) drafted an SME policy that includes SME access to credit, technology adoption, and capacity development; and (iii) carried out capacity development with SMEs through workshops and seminars. Under the P3F, the DICA will upgrade the company registration system and start a national rollout. The SME Center will develop and have endorsed an SME development road map. The government has also drafted a finance sector road map for development of the sector. 28. Increasing trade integration. The government initiated a series of reforms to liberalize trade with the aim of raising productivity and boosting exports of goods. First, to start the reintegration process, the government requested a trade policy review by the World Trade Organization and initiated preparations for the review. Second, in an effort to simplify import procedures, the government introduced automatic licensing for a selection of commodities; 3- month import and export licenses will be provided automatically for these goods. This pilot scheme reflects the government s cautious approach to liberalizing trade to ensure macroeconomic stability. Third, the government has removed or reduced barriers to trade or import of several major agricultural commodities and other products, such as imports of prepared canned foods, confectionary, fruits, and vehicles. Finally, the government enacted the

12 8 new Export and Import Law, which provides the MOC with the mandate to produce trade policy and regulations. In addition to these reforms the government also abandoned its foreign currency rationing scheme under the export first policy. Under the P3F, the government plans to complete the trade policy review process, develop a trade sector development strategy, and issue trade regulations and rules under the new Export and Import Law. This will include regulations on automatic and non-automatic import and export licensing. ADB is providing technical assistance to support these reforms (footnote 13). 3. Output 3: Stimulating Rural Development for Inclusive Growth 29. The PBL supports the government in addressing policy disincentives and constraints on access to technologies and credit faced by farmers with the view to boosting farm productivity and incomes. First, the government abolished the commercial tax on exports of agricultural commodities. Second, the government enacted the Microfinance Business Law that provides for entry of microfinance institutions into the domestic market and establishment of the Myanmar Microfinance Supervisory Enterprise at the MOFR. Finally, the CBM issued a series of notifications expanding the number of crops and other commodities that can be pledged as loan collateral, thereby improving access to credit of both SMEs and farmers. Under the P3F, the government will draft an agriculture sector development strategy. The government will also develop a financial inclusion strategy to improve the access of poor people to finance. 4. Output 4: Promoting Human Capital Development for Inclusive Growth 30. The PBL supports the government in addressing gaps in education access, quality and relevance, and management, which particularly undermine educational outcomes for the rural poor. The reforms focus on improving planning and resource allocation in the education sector, as well as promoting greater private sector participation. 31. Education sector policy development. The government has launched a process for assessing challenges and strengthening policies for education to advance human capital development as a cornerstone for inclusive growth. First, the government initiated the Comprehensive Education Sector Review (CESR), a government-led review of the education sector involving collaboration with major development partners including ADB. The main features of the CESR are: (i) identifying gaps and policy priorities for access, quality and relevance, and sector management; and (ii) mainstreaming analysis across gender, socioeconomic, and geographic dimensions. The review will also include measures to improve PFM in the sector for more transparent and efficient delivery of public education services. The CESR will be a 2-year review process with completion expected in Second, the government enacted a policy for universal provision of free textbooks to students in government-recognized primary schools with budget allocated starting in FY2012. Reflected in the P3F, the Ministry of Education (MOE) will complete a review of the policy options and priority investments for secondary education, technical and vocational education and training, and higher education, with a focus on tightening links with the labor market and integrating gender issues. 32. Enhancing planning and funding for the education sector. The government has taken steps to expand and more effectively utilize public and private resource mobilization for education. First, the government more than doubled the share of the education budget, from 3.5% of total spending in the FY2011 union budget to 6.0% of total spending in the FY2012 budget. Nearly 40% of the increased budget is allocated to addressing the deficiency in capital spending, mainly by building new schools. Second, to encourage greater private sector participation in the sector, parliament approved the Private Schools Registration Law, as a basis

13 9 for establishing and recognizing private schools at the primary and secondary level. Reflected in the P3F, to complement the increased resources allocated to the sector, the MOE will develop a costed education sector plan (CESP) drawing on the results of the CESR. The plan will provide a unified framework for government and development partner investments and will be based on clearly identified and sequenced priorities. D. Development Financing Needs 33. To support reengagement, the government has requested a single-tranche loan of SDR372,138,000 ($575,500,000 equivalent) from ADB s Special Funds resources to help sustain the reform agenda. The loan will have a 24-year term, including a grace period of 8 years; an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; and such other terms and conditions set forth in the draft loan agreement. The loan proceeds will be disbursed in accordance with the loan agreement and the provisions of ADB s Simplification of Disbursement Procedures and Related Requirements for Program Loans. 16 E. Implementation Arrangements 34. The PBL covers policy reform accomplishments from August 2011 to October 2012 with financial closing by March The P3F covers measures to be implemented from November 2012 to December The MOFR will be the executing agency and will be responsible for the overall coordination of the P3F and medium-term results framework. To oversee coordination, the MOFR has set up a steering committee, which will meet semiannually. The implementing agencies the CBM, MOAI, MOC, MOE, MOI (SME Center), and MPED (DICA) will be responsible for implementing the measures. III. DUE DILIGENCE A. Governance 35. Improved governance and anticorruption efforts have emerged as core priorities of the government. The government has just completed its first public expenditure and financial accountability (PEFA), led by the World Bank, and a PFM assessment led by the IMF. The results of these two assessments will be the basis for discussion with authorities on designing longer-term PFM reforms. ADB staff participated in the PEFA mission and closely coordinated with the IMF. The government is also considering initiating steps to join the Extractive Industries Transparency Initiative, with the gas sector included in the initiative, which will support transparency in fiscal revenues collected from the gas sector. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government. B. Poverty and Social 36. The impact of reforms will be improved inclusive growth. The reforms under the PBL are the initial steps toward a more comprehensive agenda to promote inclusive growth and lower the incidence of poverty through six channels: (i) maintaining macroeconomic stability for a lowinflation environment; (ii) improving public financial management for better service delivery to the poor, (iii) increasing investment and SME development leading to higher urban and rural wage employment; (iv) lower prices from trade reforms benefiting poorer families; (v) increased farm incomes from improved incentives to produce and better access to finance; and (vi) investments in human capital of the poor to ensure they benefit from economic growth in the longer term. The government s reforms to promote inclusive growth do entail policy costs to the government. These include the government budgetary funding to the education sector (the budget allocation to the education sector increased by MK411 billion in the FY2012 union 16 ADB Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

14 10 budget) and estimated foregone tax revenue collections exceeding $30 million from trade reforms, among others (footnote 6). C. Safeguards 37. The PBL does not trigger the safeguard policies and is categorized C for the environment, involuntary resettlement, and indigenous peoples. D. Risks and Mitigating Measures 38. Myanmar is undergoing a major transformation and there are four main risks to the reforms: (i) the government s administrative capacity to implement reforms and resources may be stretched, thereby limiting implementation of reforms; (ii) external financial and economic shocks may undermine macroeconomic stability, especially as reforms to the macroeconomic framework are still in their infancy; (iii) vested interests may resist trade and investment reforms; and (iv) natural disasters present a risk, and their adverse impact on agriculture production would reduce real farm household incomes. Measures to mitigate these risks have been or will be put in place through the PBL, P3F and other development partner initiatives include the following. First, all policy measures have been accomplished prior to October Second, the P3F signals government plans to advance reforms in these critical areas, and significant technical assistance will be provided by development partners to support the government advance reforms. Third, the government and development partners are jointly monitoring macroeconomic conditions and the proposed IMF staff monitoring program with the government will also help mitigate these risks. IV. ASSURANCES AND CONDITION 39. The government has assured ADB that implementation of the PBL shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement. 40. The loan will not become effective until the government's arrears to ADB has been fully repaid. V. RECOMMENDATION 41. I am satisfied that the proposed policy-based loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve: (i) (ii) the loan in various currencies equivalent to SDR372,138,000 to the Republic of the Union of Myanmar for the Support for Myanmar s Reforms for Inclusive Growth, from ADB s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft financing agreement presented to the Board; and a waiver of ADB's policy 17 that no loans to a borrower with arrears to ADB should be proposed to the Board. 6 December 2012 Haruhiko Kuroda President 17 ADB Review of the Bank's Major Financial Policies (Doc. R50-93). Manila.

15 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Improved inclusive growth Outcome Strengthened policy frameworks in selected sectors (macro, trade, finance, investment, agriculture, education) Performance Targets and Indicators with Baselines By end of 2017: (i) Share of wage employment in total urban employment increased over base year (2010 = 36.2%) (ii) Share of wage employment in total rural employment increased over base year (2010 = 12.9%) (iii) Per capita consumption (adjusted to inflation) of poorest 30% of households increased by 15% over base year (2010 = MK340,438) By end of 2015: (i) Tax revenue to GDP increased by 2 percentage points over base year (FY2011 = 4% of GDP) (ii) Number of registered firms increased by 20% over base year (FY2010 = 25,108 ) (iii) Number of registered SMEs owned by women increased by 25% over the base year (2010 = tbd) (iv) Non-gas exports (agriculture and manufactured goods) increased by 35% over base year (2010 = $6.5 billion) Data Sources and Reporting Mechanisms Integrated Household Living Conditions Survey in Myanmar: Poverty Profile (tentatively expected in ), Ministry of Planning and Economic Development MOFR DICA and National Statistics Office of MPED SME Center Statistics Office of MPED Assumptions and Risks Assumption Transition to democracy stays on course and peace in sub-national conflict regions resolved and or maintained. Risks External economic shocks undermine macroeconomic stability. Risk of natural disasters and their adverse impact on farm incomes Assumption Government stays on course with key macroeconomic and microeconomic reforms Risk Government s administrative capacity to implement reforms and resources maybe stretched thereby limiting implementation of reforms. (v) Approved union budget for FY2015 embeds sequenced priorities identified in the CESP with gender issues integrated Ministry of Education; publication of CESR and CESP documents

16 12 Appendix 1 Design Summary Outputs 1. Macroeconomic stability, fiscal sustainability, and public financial management strengthened 2. Investment, trade, and finance sector integration improved Performance Targets and Indicators with Baselines By end of 2014: (i) CBM conducts regular auctions of CBM deposit accounts at CBM to influence growth of reserve money (ii) Number of registered corporate taxpayers increased over base year (2011 = 16,000) By end of 2014: (i) Number of FDI projects increased by over 10% over the base year (FY2010=24 new projects with total accumulated projects =454) (ii) Number of import and export items on the non-automatic licensing list reduced over base year (2011 = all items on nonautomatic licensing list) Data Sources and Reporting Mechanisms CBM website MOFR annual tax report DICA MOC list of items on non-automatic and automatic list Assumptions and Risks Risks Weak interagency coordination Risks Domestic vested interests resisting microeconomic reforms may slow the pace of reforms Lack of capacity in the relevant agencies may also slow the pace of reforms (iii) Time it takes to import goods reduced by 20% over base year (2012 = tbd) ADB survey 2012 and 2014 (iv) Time it takes to export goods reduced by 20% over base year (2012 = tbd) ADB investment survey 2012 and 2014 (v) Time it takes to start a business reduced by 30% over base year (2012 = tbd) ADB investment survey 2012 and Rural development for inclusive growth stimulated (vi) Share of financial assets to GDP increased by 3 percentage points over base year (2010 = 26% of GDP) a By end of 2014: (i) Number of MFIs increased over base year (2009 = 9) b (ii) Share of rural households with loans increased over base year and disaggregated by gender of household head (2010: male heads = 33.2% and female heads = 32.0%) (iii) No of loan and savings CBM (measured by broad money supply to GDP) CBM/MOFR Integrated Household Living Conditions Survey in Myanmar: Poverty Profile (tentatively expected in ), Ministry of

17 Appendix 1 13 Design Summary 4. Human capital development for inclusive growth promoted Performance Targets and Indicators with Baselines accounts held at MFIs increased by 25% over base year (2009 = 385,285 borrowers) b By 2014: (i) Budget allocations to Ministry of Education more than doubled in FY2013 union budget over the base year (FY2011 = MK310 billion) Data Sources and Reporting Mechanisms Planning and Economic Development MOFR Assumptions and Risks (ii) At least three private institutions registered to provide education services in each TVET and higher education subsector Activities with Milestones (during the PBL period) Ministry of Education 1.1 Government approves new organizational structure of the CBM (July 2012) 1.2 MOFR simplifies and updates income tax regime (April 2012) 1.3 MOFR rationalizes commercial tax (April 2012) 1.4 Budget department improves the union budget structure by preparing separate union and state or region budgets for FY Ministry of Industry establishes an institutional and policy framework for SME development including establishing SME Center, drafting SME policy, and SME Center carrying out capacity development activities with SMEs (2012) 2.2 MOC relaxes barriers to trade in importation of several commodities and products (2012) 2.3 Government enacts new Export and Import Law (September 2012) 3.1 Microfinance Business Law enacted (November 2011) 3.2 CBM expands the list of items to be pledged as loan collateral to include goods and crops (April 2012) 4.1 Government enacts policy of universal free textbooks in governmentrecognized primary schools (FY2012) 4.2 Parliament approves the Private School Registration Law (November 2012) Inputs Item Amount ADB loan (est. $575.5 million equivalent) ADB = Asian Development Bank, CBM = Central Bank of Myanmar, CESP = Costed Education Sector Plan, CESR = Comprehensive Education Sector Review, DICA = Directorate of Investment and Companies Administration, FDI = foreign direct investment, FY = fiscal year, GDP = gross domestic product, MFI = microfinance institution, MOC = Ministry of Commerce, MOFR = Ministry of Finance and Revenue, MPED = Ministry of Planning and Economic Development, SME = small and medium-sized enterprise, tbd = to be determined, TVET = technical and vocational education and training. a Data from the CEIC database. b The Agency for Technical Cooperation and Development, the Banking with the Poor Network, and the Foundation for Development Corporation Microfinance Industry Report: Myanmar. Australia. Source: Asian Development Bank.

18 14 Appendix 2 LIST OF LINKED DOCUMENTS 1. Loan Agreement 2. Sector Assessment (Summary): Public Sector Management 3. Contribution to the ADB Results Framework 4. Development Coordination 5. Country Economic Indicators 6. International Monetary Fund Assessment Letter 7. Summary Poverty Reduction and Social Strategy 8. Risk Assessment and Risk Management Plan 9. List of Ineligible Items Supplementary Documents 10. Summary Program Impact Assessment 11. Sector Assessment: Macroeconomic Assessment 12. Initial Assessment (Summary): Post-Primary Education 13. Sector Assessment (Summary): Agriculture and Natural Resources 14. Problem Tree

19 DEVELOPMENT POLICY LETTER Appendix 3 15

20 16 Appendix 3

21 Appendix 3 17

22 18 Appendix 3